Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to

Question

Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area: 490,000 $175,000 Cost of new equipment and timbers Working capital required Annual net cash recelpts Cost to construct new roads in three years 55,000 Salvage value of equipment in four years 80,000 $190,000 Receipts from sales of ore, less out-of-pocket costs for salaries, ubilities, insurance, and so forth. The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company's required rate of return is 19%. Click here to view Exhibit 118-1 and Exhibit 11B-2, to determine the appropriate discount factor's) using tables. Required: a. Determine the net present value of the proposed mining project. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).) Purchase of equipment Working capital investment Annual net cash receipts Road construction Working capital released Salvage value of equipment Total cash flows Discount factor (19%) Present value Net present value b. Should the project be accoptod? No References eBook&Resources; Expanded table Difficulty: 1 Easy Learning Objective: 11-02 Evaluate the acceptablity of a investment project using the net present value method Check my.work

Explanation / Answer

1.

2. ANSWER =B) NO

Since the net present value is a negative the project should not be accepted.

Now 1 2 3 4 Purchase of Equipment -490000 Working capital investment -175000 Annual net cash receipts 190000 190000 190000 190000 Road construction -55000 Working capital released 175000 Salvage value of equipment 80000 Total cash flows -665000 190000 190000 135000 445000 Discount factor (19%) 1 0.840 0.706 0.593 0.499 Present value -665000 159600 134140 80055 222055 Net present value -69150

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